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Journal of Knowledge Management, Economics and Informaton Technology
Issue 3
June 2012
Econometric model Concerning The
Impact Of The Fiscal Policy Upon The
Economic Development. The Case Of
The Countries From Central And Eastern
Europe, Members Of The European Union
Authors: Lect. univ. dr. Mihaela Bebeelea Spiru Haret
University, no. 32-34, Unirii Street, Constanta, Romania,
mihaelabebeselea@yahoo.com, Lect. univ. dr. Paula
Cornelia Mitran Spiru Haret University, no. 32-34, Unirii
Street, Constanta, Romania, mitran_paula_cornelia@
yahoo.com; Lect. univ. dr. Octavian Neguri Spiru
Haret University, no. 32-34, Unirii Street, Constanta,
Romania, neguritaoctav@yahoo.co.uk
This article aims to demonstrate the confrmation or the refutation of the
hypothesis that there is a connection between fscal policy and economic
development. The study begins with an overview of the main theoretical
contributions. A few indicators that give the measure of the economic
development are analysed for the sample of the Central and South Eastern
European countries, members of the EU. The empirical analysis seeks to
establish the relevance of the main determinants of the economic development
(GDP per capita) and the three levers of the fscal policy (fscal pressure, the
share of public expenditure in GDP and budgetary balance in the share of GDP),
for each country, of the sample of the 12 countries of Central and South Eastern
Europe, the new members of the European Union, during 2001-2010.
Keywords: economic development; economic growth; fscal policy; panel data;
EU.
JEL Classifcation: C21, C23, E62, H20, O11
Econometric model Concerning The Impact Of The Fiscal Policy Upon The
Economic Development. The Case Of The Countries From Central And Eastern
Europe, Members Of The European Union
Issue 3
June 2012
Introduction
The economic growth is a complex process that aims the economic
system as a whole and its dynamics. Through its content, it means a positive
ascending evolution, of the national economy, without excluding the
conjectural fuctuations and even some certain temporary regressions. Even
terms like zero economic growth and negative economic growth are used.
The results of the economic growth can be measured through synthetic
indicators as gross domestic product (GDP), gross national product (BNB),
national income, both total and per inhabitant (VN)
1
.
The types of economic growth are:
The extensive type, corresponding to quantitative sides of the direct
factors which contribute to GDP forming;
The intensive type, corresponding to qualitative sides. It is specifc,
especially to advanced economies. The two aspects are not exclusive, alternating
in the economic development of a country.
In conclusion, the characteristics of the process of economic growth
can be:
1. conducted on the basis of an ample process of formation of a new
technical way of specifc to corporations;
2. a type of mainly intensive growth is taking shape;
3. is related to the quality of life.
The economic development simultaneously captures quantitative,
qualitative and structural aspects of the economic evolution, in conjunction
with demographic development and general issue of the human, and with the
evolution of the ecological balance. The basic idea that defnes the economic
development is that of change, of transformation of structures in economy, of
economic system behaviour, of the relationship between the human activities
and the environment.
The concept of economic development is multidimensional.
Firstly, the economic development implies the economic growth
itself, there is no economic development process, without an increase of the
macroeconomic results on long term.
Secondly, economic development has an ample historical connotation;
it captures the process of the economy transition of a given human society, from
an inferior form of evolution to another superior one, including numerous
1 In our study the synthetic indicator, which quantifes the economic growth is GDP per capital
Scientfc Papers (www.scientfcpapers.org)
Journal of Knowledge Management, Economics and Informaton Technology
Issue 3
June 2012
temporary zigzags caused by diferent historical situations.
Thirdly, the economic development can be defned in a narrower
sense, as the development of production factors, namely the development of
the main components of the economy within the framework of a national-
state space.
Fourthly, the concept of economic development concerns, especially
at present, in particular the progress made in the relations between operators
and their economic environment, the structures not only technical, but also
social and psychosocial of the production and the national environment.
In conclusion, any economic development supposes also an economic
growth, but not any economic growth represents an economic development.
In this context, of a given economic growth, we are trying to capture the
economic development infuenced by the fscal policy levers (fscal pressure,
the share of public expenditure in GDP and the budgetary balance in GDP).
Fiscal policy ranks as a sphere of coverage within the budgetary policy,
which falls it self within the scope of the fnancial policy and further into the
economic policy.
The fscal policy, as part of the economic policy of the State includes
the set of methods, techniques, principles relating to operations, relations,
institutions and rules specifc for determining and levying the taxes, the fees
and the contributions, materializing the state options, at a given time in this
area.
The fscal policy, like all economic policy, is characterized by
dynamism, because the economic-social life also is in a continuous change and
diversifcation.
In any context, it should be borne in mind at all times an important
aspect; the fscal policy is only one of the fnancial policy components, namely,
the economic one. Therefore, the fscal policy cannot solve alone the problems
of the errors in an economy compassed by the crisis and it is unable to maintain
the process of macroeconomic stabilisation, under the terms of a growing
unemployment and a high rate of infation.
In the analysis of the fscal policy impact upon the economic growth,
we must not ignore the short-term efects the fscal policy is an instrument
through which short-term fuctuations are alleviated, the budgetary taxes and
expenses being used as levers in changing the aggregate demand in order to
move the economy to the potential level of GDP. The fscal and budgetary
policy is more a political priority than an economic one, conclusion that was
Econometric model Concerning The Impact Of The Fiscal Policy Upon The
Economic Development. The Case Of The Countries From Central And Eastern
Europe, Members Of The European Union
Issue 3
June 2012
reached as a result of the econometric analyses carried out during 1997-2003
for Romania, Bulgaria, Lithuania, Latvia, Estonia, Poland, Hungary, the Czech
Republic, Slovakia and Slovenia (Fabrizio & Mody, 2006).
The objective of this study is to analyse the determinants of the
economic development starting with a theoretical approach, continuing with
a descriptive one and fnishing with an empirical one. The countries concerned
are the EU member countries, observed during 2001-2010. The study captures
also the implications, in terms of public policies, in the current context of the
world economic crisis.
The article is structured as follows: section 2 constitutes a review of
the main contributions at theoretical level brought over time, with reference
to the models of economic growth; section 3 is a descriptive analysis of the
main determinants of the economic growth; an empirical approach to these
problems is presented in section 4; and section 5 concludes.
Theoretical Fundaments and Hypotheses
The hypothesis tested was as follows: the existence of a connexion
between the fscal policy and the economic development. The development of
Solows neoclassical model of growth has allowed the study of the dynamic
impact that taxation has on growth. In the same context, Diamond introduces
in the model the intergenerational factor and he highlights the growth efect
generated by the fscal policy. As in the neoclassical model to achieve the status
of stationary state is determined by external factors (the population dynamics
and the technological progress), the fscal policy can only infuence the rate of
growth during the period of transition towards it. Because of that, it may be
considered that the diferences in the fscal system, from the defcit or from
the budgetary policy can be considered as important factors for the level of
production, but less for long-term growth rates (Diamond, 1956).
The models of endogen growth tend to transform the temporary
efects of the fscal policy in permanent efects of growth (Romer, 1986). Most
of the growth models consider taxes on investment and on income as having
a negative efect on economic growth. These taxes afect the rate of growth,
directly, by reducing the net proft earned. But not all taxes afect the growth.
In the models in which the employment ofer is considered to be exogenous,
the rate of growth is immune to the level of taxes on consumption. These
taxes do not distort the relative price of consumption in the current period in
Scientfc Papers (www.scientfcpapers.org)
Journal of Knowledge Management, Economics and Informaton Technology
Issue 3
June 2012
relationship with the future, leaving unchanged the desire of accumulation of
capital.
In conclusion, in what concerns the fscal system, the elaborated
economic patterns highlighted the fact that, thanks to the dues and taxes
characteristics to distort the economic activity of private agents, an increase of
their level limits the economic growth.
The efect of a growth in the governmental consumption can be
considered to be null under the circumstances where we consider this
component of the public expenses not modifying the productivity of the private
area. On the contrary, Aschauer and Barro consider that public investments
have a positive impact on the private area and implicitly on the growth rate
(Aschauer & Barro, 1990).
The efects of the governmental shortage are much more complex. In
the intergenerational patterns, governmental shortage leads to a decrease of
the saving rate and the growth rate (Alogoskoufs & Rodrick, 1991). In patterns
with unlimited horizon, the shortage depends on the variables that must be
adjusted in the future for clearing (Chamley, 1986). If a raised shortage in
present time will be equalised in the future with a more increased level of taxes
and dues, the growth rate will diminish.
The fscal policies may exert important macroeconomic efects,
especially short term, the use of diferent instruments leading to diferenced
results (Skinner, 1992). Thus, a change in the budgetary expenses determine
a raise of the public economic sector, while a decrease of the tax rate will
make the permanent available income raise, leading to the increase of the
consumption expenses, implicitly, to the development of the private economic
sector. The choice between the two instruments will be made according to
the social benefts expected to be obtained from a larger consumption of
from more products in services that are oriented to the public area. Another
element that may be taken into consideration is the clients choice to increase
consumption expenses or saving, after the income increase due to fscal system
rate reduction. If they choose the second option, the immediate efect over
the production is little perceptible, expecting to be expressed on long term by
transforming savings in investments. This diferentiation does not appear in
case of the budgetary expenses modifcation, the efect being immediately felt
in the aggregated request, namely in the production level. The diferentiation
between the two instruments of the fscal policy is disclosed also by the changes
character. Thus, a permanent change in the fscal system rate leads to a much
Econometric model Concerning The Impact Of The Fiscal Policy Upon The
Economic Development. The Case Of The Countries From Central And Eastern
Europe, Members Of The European Union
Issue 3
June 2012
stronger efect as in case of a temporary change that could be compensated by
the economys fuctuations. Concerning the budgetary expenses modifcations,
their temporary character has a much stronger impact.
Empirical model, dates and methodology
Through empirical analysis, we intend to identify the relevant
determiners of the economic development, weighed through the gross
domestic product per capita, estimated on the parity of the buying powers.
For their selection we have in view our intuitions and theoretical
fundaments and we consider as being relevant factors: (i) the fscal system
level from other countries and (ii) the weight of public expenses in GDP and
(iii) the weight of budgetary balance in GDP.
(i) Concerning the fscal system, the elaborated economic patterns
highlighted the fact that, due to the taxes and dues characteristics to distort
the economic activity of private agents, a raise of their level limits the economic
growth, while a decrease of their level is able to stimulate economic growth.
(ii) A change in the budgetary expenses determines a raise of the public
sector weight in economy, while a decrease of the tax rate will increase the
available income, leading towards a consumption expenses growth, implicitly
to the development of the economic private sector.
(iii) The efects of the governmental shortage are much more complex.
In the intergenerational patterns, the governmental shortage leads to a decrease
of the saving rate and of the growth rate.
Our empirical study is based on a panel from 12 countries (Bulgaria
BG, Cyprus- CY, Czech Republic CZ, Estonia EE, Hungary HU, Latvia
- LV, Lithuania LT, Malta MT, Poland PL, Romania RO, Slovenia SI,
Slovakia SK) selected as being members of the EU and analysed between
2001-2010.
The empirical specifcation takes the following shape:
Y
it
= + X
it

it
+
i
+
t
+
it
where:
Y
it
dependent variable;
X
it
independent variables vector;
coefcient of free term;
coefcient of independent variable;
Scientfc Papers (www.scientfcpapers.org)
Journal of Knowledge Management, Economics and Informaton Technology
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June 2012
Results and Discussions
Descriptive Analysis
The role of taxes as fscal policy elements manifests fnancially,
economically and socially and its real mode of manifestation diferentiate from
an economic development step to another (Bebeelea, 2010). In most of the
countries in the world, the most important role of the taxes manifests fnancially
because they represent the main means of obtaining the fnancial resources
necessary to cover public expenses. Economically, taxes role consists in the
fact that, they are used as economical politic instruments, through which some
activities, areas (regions), consumption of some merchandise and/or services,
commercial relations with the foreign countries, generally, can be stimulated
or limited. Socially, taxes role is materialized in the fact that, through them,
the country performances for the redistribution of an important part from the
gross domestic product between social groups and individuals. The great efect
of the taxes role is socially represented by the fscal pressure growth.
Fiscal pressure means how overwhelming the taxes are, or, in other
words, how big the fscal burden over the taxpayers shoulders is.
2
Fiscal
pressure is measured through the fscal system rate. The term of fscal pressure
rate or fscal system rate is closely connected to mandatory samples and equal
to the rate between the taxes system and social dues really taken by the state
and GDP. From here, this indicator has double meaning:
Widely speaking, the fscal degree (or fscal system rate)
macroeconomically may be expressed as a rate between budget collections as
taxes and social dues, on one side, and GDP, on the other side;
Narrowly speaking, fscal degree is refected through the percentage
rate between budget collections as taxes (fscal income), on one side, and GDP,
on the other side.
This indicator allows the achievement of a comparison between states,
2 Te increase of tax burden is a source of confict and does not generate a general motivation for work,
thereby encouraging work on the black market and fraud.
efect parameter specifc to sections;
efect parameter (fxed or random) specifc to time periods;
it random variables;
i - number of sections after which the regression is made;
t - period of time.
Econometric model Concerning The Impact Of The Fiscal Policy Upon The
Economic Development. The Case Of The Countries From Central And Eastern
Europe, Members Of The European Union
Issue 3
June 2012
because the weight of those taxes and social dues is not indiferent in fnancing
the social security assured by the public power.
Thus, in developed countries, the state takes over, at its will, through taxes a
larger part form the gross domestic product, than in developing countries.
To mention is, thus, the fact that there are diferences, sometimes pretty
important, and between developed countries, as between developing countries
as well.
Comparative evolutions of fscal pressure in central and south east
countries, new members of the EU are presented as:
Figure 1 Tax burden ratio (excluding SSC) in central and south east countries
new members of the UE
Source: elaborated by authors, in Eurostat database (online data codes: gov_a_tax_ag)
As we mentioned, above, fscal pressure, calculated based on the
budgetary income, leads to the following conclusions. The lowest values are
specifc to the less developed countries, while to more developed countries
we associate a higher fscal pressure. It is normal to be this way because where
there is a high level of life, there also is a contributive capacity, therefore the
possibility to attract signifcant resources to the budget.
Taking these diferences concerning the fscal level in one country or
another, into consideration, it is normal the importance given the identifcation
of factors that express this fact.
In specialty literature we fnd opinions according to which the fscal
rate level from a certain country is infuenced, both by factors extern to the
taxes system and by its internal factors.
From external factors category, we frstly exemplify the development
degree of a country, highlighted through the gross product per inhabitant.
Thus, in developed countries, the income and the wealth of individuals are
Scientfc Papers (www.scientfcpapers.org)
Journal of Knowledge Management, Economics and Informaton Technology
Issue 3
June 2012
more consistent, their contributive capacity is higher and the state can decide
high taxes, without the fscal burden become unbearable.
GDP evolution per individual in central and south east countries, new
members of the EU, is presented as:
Figure 2 GDP per capita (%) in central and south east countries new
members of the UE
Source: elaborated by the author based on the Eurostat database (online data codes:
nama_gdp_c, nama_gdp_k , tec00001 or tsieb020)
As noticed from the GDP per capita evolution, an active performance,
until 2007 was registered by Estonia, Latvia, Lithuania, Slovenia and Slovakia.
After crucial year 2008, also the perspectives for the future two years
are less thrilling, although there are signs of economies revival. Prognosis
elaborated indicate the fact that in the next few years, ECSE countries will
develop pretty unequal, with a high diversity and will not reach the growth level
before the crisis. The ECSE countries evolution can be separated in 3 groups 1)
Poland with the solidest economy in the area; 2) 4 countries that achieved a
modest growth during 2010 Czech republic, Slovenia, Romania and Slovakia;
3) 5 countries whose economies decreased during 2010 Hungary, Bulgaria,
Lithuania and Latvia.
Priorities established by the public authorities regarding the
destination of fnancial resources concentrated for the state, represent another
external factor of infuence of the fscal pressure.
Thus, in countries with high life level of people, in which the state
spends more for the social security, education, health, fscal system rate is
higher. The state is involved in the social and economic life, and the degree of
taxes reversibility is high. This fact is shown in the demand increase and the
new jobs creation.
Other external factors are: property structure, the degree of

20
30
40
50
60
70
80
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
BG CY CZ EE LT LV HU MT PL RO SI SK
Econometric model Concerning The Impact Of The Fiscal Policy Upon The
Economic Development. The Case Of The Countries From Central And Eastern
Europe, Members Of The European Union
Issue 3
June 2012
understanding by the taxpayers the budgetary necessities and political
adhesion to the Governments politics, but also the democracy stage in one
country or another. Also, public credits used for public fnancing expenses
could appear short term as a decrease factor of fscal pressure, but in long term
they strengthen it.
Figure 3 Public expenses evolution in GDP in central and south east
countries new members of the UE
Source: elaborated by authors in Eurostat database (online data codes: gov_a_main)
Figure 4 Budgetary balance evolution in GDP in central and south east
countries, new members of the EU
Source: elaborated by authors in Eurostat tsieb 080 and tsieb 090

Among internal factors of taxes system, there is, frstly, progression
taxation quotas ladder, progressive taxes attracting solider income than
proportional ones. Thus, in countries where gains from taxes have a higher
weight in gross domestic product, we also fnd taxation quotas with a higher
progression. Related to this aspect, we have to underline that countries with a
lower fscal degree achieve to attract a part form the capitals in countries with
higher fscal system. In the internal factors category, there is also placed the
taxable subjects determination method. Here, important are the deductions
admitted and what are the criteria involved, as well as the fscal facilities
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Journal of Knowledge Management, Economics and Informaton Technology
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June 2012
importance.
Empirical Results
For the identifcation of the connection form of the variables, we will
represent graphically the cloud of dots:
The analysis of the method in which the dots are disposed on the
graph surface, allows the study of the following aspects, related to:
1. connection existence: whereas dots are not spread, but grouped,
placed on a line, fact which refects that variables do not modify simultaneously
after a rule, we can assert that between Y (dependent variable) and X
(independent variable) there is a connection in the pattern;
2. connection sense: because most of dots are placed on a descendent
line, the connection is inverse proportional, which means that a growth of the
gross domestic product determines the decrease of fscal pressure, the weight
of budgetary expenses in gdp and budgetary shortage weight in gdp;
3. connection form: the form of the part where the dots are placed
suggests the connection form between the variables. In our case the part is
linear (looks like a line), fact that suggests a linear connection, Y = aX + b + ;
4. connection intensity: the lateral where the dots are is inverse
proportional with the connection intensity a wide side indicates a connection
of low intensity, a narrow side a strong, tight one. In our case, the relatively
narrow side suggests the existence of a medium intensity to strong connection
in the values pattern.
The econometric testing of the relation between GDP per
capita and fscal policies instruments (fscal pressure,
budgetary expenses weight in gdp and budgetary shortage
Econometric model Concerning The Impact Of The Fiscal Policy Upon The
Economic Development. The Case Of The Countries From Central And Eastern
Europe, Members Of The European Union
Issue 3
June 2012
weight in gdp)
Correlated Random Efects - Hausman Test
Equation: REGRESIE
Test cross-section random efects

Test Summary Chi-Sq.
Statistic Chi-Sq. d.f. Prob.

Cross-section random 6.294119 3 0.0981

Cross-section random efects test comparisons:

Variable Fixed Random Var(Dif.) Prob.

TAX_B 2.040224 2.649749 0.087912 0.0398
GOV_EXP -0.895759 -1.060103 0.028621 0.3313
GOV_DEF -0.960684 -1.275455 0.054611 0.1780

Cross-section random efects test equation:
Dependent Variable: PIB
Method: Panel Least Squares
Date: 03/28/12 Time: 14:21
Sample: 2001 2010
Periods included: 10
Cross-sections included: 12
Total panel (balanced) observations: 120

Variable Coefcient Std. Error t-Statistic Prob.

C 34.69382 19.44086 1.784582 0.0772
TAX_B 2.040224 1.065780 1.914301 0.0583
GOV_EXP -0.895759 0.885372 -1.011732 0.3140
GOV_DEF -0.960684 1.045979 -0.918454 0.3605

Efects Specifcation

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Journal of Knowledge Management, Economics and Informaton Technology
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June 2012
Cross-section fxed (dummy variables)

R-squared 0.883116 Mean dependent var 67.70167
Adjusted R-squared 0.867531 S.D. dependent var 22.96210
S.E. of regression 8.357357 Akaike info criterio 7.200630
Sum squared resid 7333.768 Schwarz criterion 7.549066
Log likelihood -417.0378 Hannan-Quinn criter. 7.342132
F-statistic 56.66591 Durbin-Watson stat 0.253968
Prob(F-statistic) 0.000000

Source: Eviews
Conclusions
To evaluate the results obtained thanks to the linear pattern of
multiple regression, it is necessary to establish, from the very beginning, if this
can be considered to be correct, and the results that this ofers, can be used in
real macroeconomical analysis.
As it can be noticed, the probability that this pattern be a correct one
is extremely high approximately 88.3%, this conclusion being able to be
formulated on the values determined with the help of Eviews program for R
tests squared (0,883116) and Adjusted R squared (0,9989). Determination
coefcient R has an extremely high value, fact which matches the validity of
the pattern used. Additionally, specifc to pool type regressions, Durbin-
Watson test indicates certain existent autocorrelations in residual variables,
fact which doesnt validate though the global quality of the pattern.
Also, the validity of this regression pattern is confrmed by the F tests
values statistically (18023.91 value a lot superior to the tables level which can
be considered a marker point in the validity analysis of econometric patterns),
as wqwell as the null risk degree (refected through Prob F value statistic).
Based on the elements mentioned above, we can consider the regression
pattern that describes the correlation between the gross domestic product
value and fscal politics variables, as being correct, which refects the real level
of the economic development.
This regression pattern allows us to establish a series of aspects
regarding the existent relation between variables used. To remark is the fact
that between the gross domestic product value and fscal politics instruments,
Econometric model Concerning The Impact Of The Fiscal Policy Upon The
Economic Development. The Case Of The Countries From Central And Eastern
Europe, Members Of The European Union
Issue 3
June 2012
between 2011 -2010 there is a signifcant relationship. Thus, we can mention the
fact that the results obtained emphasize the following:
1. between gross domestic product evolution and fscal pressure
evolution, there is an inverse relationship, in the sense that a decrease of the
fscal system level determines in time a growth of the gross domestic product
per capita level;
2. between the gross domestic product evolution and public expenses
evolution and public expenses evolution there is an inverse relation in the sense
that a public expenses decrease determines in time a growth of gross domestic
product per capita level. This situation is a paradox, but it can be explained
through the fact that the governmental authorities in these countries, most of
which were ex-communist, diminished governmental intervention in economy
to ofer a higher degree of markets democracy;
3. Between gross domestic product evolution and budgetary balance
evolution, there is an inverse relation, in the sense that a decrease of the
budgetary shortage determines in time a growth of the gross domestic product
per capita level.
In conclusion, we appreciate that the economic development process
can be infuenced through fscal policies measures taken by the governmental
authorities. Thus, efects of such measures are diverse and diferent from a
particular case to another, which triggers the lack of a universal valid solution
for governmental authorities that wish to stimulate economic development. In
consequence, the success of using fscal politics instruments by the authorities
for training and intensifcation of economic development depends decisively
on their capacity to appreciate current economic situation, to choose the right
intervention instrument and to correctly anticipate the efects produced by its
use in the economy.
Acknowledgements
I should like to thank to referees of this journal for future helpful
comments on an version of this paper.
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Scientfc Papers (www.scientfcpapers.org)
Journal of Knowledge Management, Economics and Informaton Technology
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